Client screening: how to reduce malpractice exposure.

• Author: Murray, Mark F.

Practitioners should at all times be selective and avoid high-risk clients. Knowing when to walk away from a client can be as important to a firm's survival as acquiring new clients.

There was a time when practitioners could accept almost every engagement without worrying about malpractice. However, with the increasing prevalence of fraud by management, clients' unwillingness or inability to pay for professional services, financial troubles affecting enterprises of all sizes, and dishonest professionals cloaking themselves in an image of integrity, screening clients before acceptance is becoming an important part of practice management. By establishing and remaining faithful to client-acceptance criteria and by documenting their efforts, practitioners can reduce their malpractice exposure. Clients who are untrustworthy and disreputable are too frequently involved in questionable financial transactions. A practitioner's connection in any way with such clients or activities may result in malpractice litigation by the wronged party.

Note: As part of the policy and procedure guidelines of the AICPA's Voluntary Tax Practice Review program, a thorough review of perspective clients is warranted to eliminate lawsuits.

Warning Signs

Practitioners should beware of the following characteristics when choosing clients:

[] Present or impending financial or organizational difficulty. Insufficient working capital, an industry experiencing many business failures, high turnover in key positions, the vesting of management responsibilities in one person when conditions warrant that they be shared by several persons, poor credit, dependence on a few select customers for products or services and companies that invest other people's money are all potential red flags. If a financially troubled client files for bankruptcy, there is a strong possibility that the practitioner will be named as a defendant in any resulting litigation.

[] Involvement in suspicious transactions. Practitioners should be alert to any activity that is (or appears to be) illegal, such as bribery, kickbacks, unauthorized corporate transactions, illegal contributions, or artificially improved financial statements. Increasingly, courts are expecting practitioners to detect fraud, embezzlement and other irregularities in a client's organization.

[] Unreasonableness and uncooperativeness. Practitioners should be wary of clients who balk at providing necessary documents and records in a timely...